TaxTMI 
TaxTMI 
2026 (6) TMI 1434
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....ransactions involving frequent subscription to and redemption of redeemable preference shares at par without any dividend or capital appreciation were in substance an advancement lending of money to the AE in the garb of preference shares and not a simple share transaction thus attracting the provisions of Section 92B of the Income-tax Act 1961. 2 Whether on the facts and in the circumstances of the case and in law, the Ld CIT A was justified in deleting the transfer pricing adjustment by relying solely on judicial precedents without appreciating that the instant case falls under the exception to the non re characterization rule as the nomenclature used by the assessee subscription to preference shares did not reflect the true nature and conduct of the transaction running account loan, as evidenced by the lack of commercial justification and absence of essential documentation. 3 Whether, on the facts and in the circumstances of the case and in law, the Ld CIT A erred in disregarding the TPOs contention that the investment in non-convertible non dividend paying redeemable preference shares constitutes debt and falls within the purview of an international transactio....
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.... the balance sheet, however, the own fund and interest free loans according to him had already been invested in the investment and fixed assets and therefore were no longer available for advancing interest free loans. As per ld. Assessing Officer, assessee has advanced loans to its subsidiaries or related parties from where no business has been generated during the year and no income shown to this account. Thus, by placing reliance on the decision of Hon'ble Supreme Court in the case of S.A. Builders Ltd. [288 ITR 1 (SC)] and by applying the provisions of section 36(1)(iii), he computed the disallowance on account of interest expense relating to the interest bearing funds diverted to subsidiaries. In this respect, he applied the rate of 11.91% which was adopted by the ld. TPO while computing the adjustment on account of redemption of preference shares capital. The disallowance so computed by ld. AO u/s. 36(1)(iii) is tabulated below: A. Total amount of loans advance to subsidiaries at lower rate of 9% 2,91,10,000 B. Total Interest bearing funds diverted Interest free 4,10,11,577 C. Rate at which interest is to be disallowed 11.91% D. Interest ch....
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....rall nature and frequency of transaction in the form of running account, ld. TPO held that such subscription and redemption of shares on which no dividend was paid/payable were in the nature of loan and not investment in shares. Thus, the said transaction was, according to him, in the nature of loan on which he computed the arms length price by charging interest as compensation for use of money advanced to an AE. According to the ld. TPO, no independent third party would subscribe to such preference shares at par without any reasonable return on investment and therefore, it is justified to treat the same as loan to be benchmarked by applying an interest rate. Ld. TPO applied the interest rate of 11.91% to impute interest cost on the same. 3.4. This issue has been a legacy issue since assessment year 2009-10, fact of which is noted by ld. TPO in his order, whereby he noted the decision held in favour of the assessee by the Coordinate Bench in assessee's own case for AY 2009-10 in ITA No. 1213/Mum dated 27.07.2015, whereby TP adjustment made by the ld. TPO was directed to be deleted as held to be wrongly re-characterized, since the transaction is apparently in the nature of su....
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....ion. The TPO /Assessing Officer cannot disregarded any apparent transaction and substitute it, without any material of exception circumstance highlighting that assessee has tried to conceal the real transaction or some sham transaction has been unearthed. The TPO cannot question the commercial expediency of the transaction entered into by the assessee unless there are evidence and circumstances to doubt. Here it is a case of investment in shares and it cannot be given different colour so as to expand the scope of transfer pricing adjustments by re-characterizing it as interest free loan. Now. whether in a third party scenario, if an independent enterprise subscribes to a share, can it be characterize as loan. If not, then this transaction also cannot be inferred as loan. The contention of the Ld. Counsel is also supported by the Hon'ble jurisdictional High Court in the case of Bexiskier Dhboal SA, ITA No. 776 of 2011 order dated 30th August, 2012 and by various other decisions, as cited by him. The Coordinate Benches of the Tribunal have been consistently holding that subscription of shares cannot be characterizes as loan and therefore no interest should be imputed by treating ....
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....re dismissed. 6. On the second issue relating to disallowance made u/s. 36(1)(iii) of Rs. 1,57,31,580/- by the ld. Assessing Officer, fact of the matter is that assessee had debited Rs. 27,78,06,357/- in its Profit and Loss account. Ld. Assessing Officer has made the disallowance of Rs. 57,31,580/- on the basis that assessee has not established the commercial expediency for advancing interest-free loans to sister concerns/subsidiaries. He considered the bond yield rate of 11.91% as adopted by ld. TPO for the purpose of making the disallowance. 6.1. As on 31.03.2016, assessee had given interest-free and interest-bearing advances, totalling to Rs. 79,75,88,353/-. Breakup of this can be noted into three buckets: i. Interest-free advances to related parties for Rs. 4,10,11,577/- ii. Interest-bearing advance with interest at the rate of 9% granted to its associated enterprise ESSAR Services (Mauritius) Rs. 2,91,10,000/- iii. Interest-bearing advances with interest rate higher than 13.50% of Rs. 72,74,66,776/- . 6.2. For the interest-free advances to related parties, ld. Assessing Officer has adopted the bond yield rate of 11.91% as taken by ld. TPO to....
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....her decisions, it was held that no disallowance of interest is called for. Furthermore, the Hon'ble Jurisdictional High Court of Bombay, on an appeal by the Revenue against the decision of Coordinate Bench for Assessment Year 2009-10, upheld the order of the Tribunal and dismissed the appeal filed by the Revenue. Relevant extract from the decision of Coordinate Bench in appeal for Assessment Year 2009-10 is as under: "57 in such a situation, where the assessee has substantial own funds, then presumption is that assessee has given advance to its sister concern from its own funds. Thus, following the ratio laid down by the Hon'ble jurisdictional High Court in the case of Reliance Utilities and Power Ltd (supra) which have been followed in various other decisions, we hold that no disallowance of interest is called for. Accordingly, ground no. 22 is treated as allowed." (Emphasis supplied) 8.1. Extracted below is the relevant paragraph from the decision of Hon'ble High Court of Bombay in assessee's own case for Assessment Year 2009-10: "4. Tribunal came to the conclusion that the assessee had sufficient interest free loans out of which subj....